The Bank of Japan on Wednesday installed a new governor and two deputy governors who — in line with the wishes of Prime Minister Shinzo Abe — are advocates of ultra-easy monetary policy.
Attention is now focused on what specific policy actions the new central bank team will take. But while benefits, including a weaker yen and rising share prices, have materialized in anticipation of further easing, drawbacks are also starting to emerge — most notably in the form of rising prices.
In a sign that a mini bubble may be at hand, condominiums in suburban Tokyo are being marketed for nearly ¥100 million per unit.
Some may argue that rising prices are just part of the journey needed to end deflation. But while automakers may be offering higher bonuses to offset the rise in household expenses, employees at small and midsize companies who cannot harbor the same expectations as their bigger counterparts are going to suffer right along with those depending on pension benefits.
Instead of simply raising salaries to reflect the benefits that the weak yen is bringing to their exports, automakers should try to pass along those benefits to their subcontractors — the same people they demanded price cuts from during the tough times when the currency was ascending — so the benefits of the yen’s fall can spread to wider segments of the economy.
The yen was trading at ¥81.10 to the dollar when the Lower House was dissolved for the general election on Nov. 16, 2012. It has since fallen by about 20 percent, sending prices for imports, which until October had fallen for six consecutive months year on year, soaring. Import prices rose 13.2 percent in February alone.
We need to realize that the falling yen is bringing both benefits — in the form of higher exports — and drawbacks, in the form of a higher cost of living. It is therefore essential that the pros and cons be weighed and compared.
For households, which can’t realistically hope for substantial wage gains due to tough competition from overseas labor, the lower import prices caused by the strong yen were a blessing that strengthened their purchasing power.
In macroeconomic terms, private-sector consumption and imports combined outweighed the value of exports. Failing to pay sufficient attention to the drawbacks of the yen’s fall might turn out to be the pitfall of “Abenomics.”
It has to be noted that a weaker yen will also further worsen Japan’s trade balance. This is primarily because 61.6 percent of the nation’s export transactions and 77.1 percent of its import transactions were carried out in foreign currencies, according to Finance Ministry data as of January.
The weaker the yen gets, the more Japan’s foreign currency-denominated trade deficits will continue to grow, prompting further outflows of Japanese income overseas.
The high share of foreign currency-denominated transactions in Japan’s imports is mainly because international commodities, such as crude oil and wheat, are traded in dollars. Japanese demand in such products is reflected in international prices via the dollar. Commodity trade inside Japan is of course carried out in yen, but it has little international impact because foreign participation is so low. This situation must be quickly rectified.
Other things needing rectification are the deep-rooted beliefs within the business community, especially among stockbrokers, that a lower yen automatically translates into higher share prices, or that a weak yen is good and a strong yen is bad.
Right after Japan lost World War II, there was a time when we were unable to use yen to buy goods from overseas because the nation’s credibility was at rock bottom. It was crucial for Japan to accumulate dollars, which would be gladly accepted by anybody.
When I landed my first job in 1956, Japan’s foreign currency reserves stood at roughly $2 billion. Earlier, they had dropped so sharply Japan could only pay for only three months’ worth of imports; they later grew to about $2 billion, thanks to special demand related to the Korean War. It was conditions like these in the postwar era that helped form Japan’s export-oriented policies and belief in the weak yen.
Today, having undergone full economic development, Japan is awash in foreign currency reserves. In fact, a much of them have gone stale in the sense that the value of the dollar has shrunk from ¥360 in the early 1970s to around ¥90 now.
While many people continue to believe in the benefits of a weak yen, they need to realize that under Japan’s current trade structure, its deficits increase the lower the yen drops against other currencies. What is needed is a change in mindset to the idea that both trade and overseas investment must be conducted on a yen-denominated basis. If import and export transactions are carried out in yen, there will be no need for Japan to worry about every little up and down in the exchange rates.
Japan’s bid to drive the yen lower was one of the hot behind-the-scenes issues at the G-7 and G-20 meetings in Moscow in February. The G-20 statement issued on Feb. 16 made it clear that a currency depreciation war, in which countries compete to drive their own currencies lower, needs to be avoided, noting that the objective of monetary policy should be to improve economic growth.
Such reactions seem natural, given that Abenomics will purportedly put an end to deflation and the strong yen. No such suspicions would emerge if Japan conducted all its trade in yen.
It is essential for the government to recognize, in a balanced manner, the positive and negative effects of both a strong yen and a weak yen, and to flesh out Abenomics with concrete actions that can promote economic growth.
Teruhiko Mano is an international economics analyst.
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